ISRAEL'S 2007 ECONOMIC ARRANGEMENTS BILL A MIX OF

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 003958

SIPDIS

NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, WAECHTER; EB/OMA
FOR GARRY; NSC FOR WATERS; TREASURY FOR HIRSON

E.O. 12958: DECL: 10/06/2016
TAGS: ECON EFIN IS PGOV
SUBJECT: ISRAEL'S 2007 ECONOMIC ARRANGEMENTS BILL A MIX OF
OLD AND NEW REFORMS


Classified By: Economic Counselor William Weinstein for reasons 1.4 b a
nd d

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SUMMARY
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1. (U) Israel's 2007 Economic Arrangements Bill includes both
new reform initiatives and attempts to enact several old
programs from previous years. (Note: The Economic
Arrangements Bill, which typically moves through the Knesset
approval process in tandem with the state budget, outlines
the economic reforms and budget procedures planned for the
upcoming budget year. End Note.) The bill, passed by the
Cabinet on September 12, seeks to continue previous
privatization efforts and initiate new ones, while also
opening up the Ministry of Defense (MOD) budgeting process to
increased oversight by the Ministry of Finance (MOF) and the
Knesset. In addition, the bill calls for the government to
continue its efforts to increase Israel's labor force
participation rate and to encourage competition in the
aviation sector. While some of these initiatives will be
relatively uncontroversial, others - such as the proposed
privatizations of the Israel Electric Corporation and Israel
Military Industries, which have been strongly opposed by
their well-organized labor forces in prior years - remain
deeply contentious. End Summary.

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PRIVATIZATION EFFORTS CONTINUE
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2. (U) Chief among the reforms being considered again for
2007 is the restructuring and partial privatization of the
Israel Electric Corporation (IEC),an initiative originally
scheduled for implementation in March 2006 but delayed to
March 2007. If the GOI does not submit to pressure to remove
the privatization plans from the Arrangements Bill, the
legislation will call for the company to be divided into
separate units for electricity production, transport, and
distribution. Each of those units would then be split into
individual companies that would compete against each other
and be partially privatized. IEC Ltd., would become a
holding company wholly owned by the GOI.


3. (C) Opposition from IEC's well-organized labor force has
hamstrung previous attempts to implement the reforms planned
for the company and is threatening to do so again. To
protest the Cabinet's approval of the 2007 Arrangements Bill
in mid-September, for example, the IEC workers' union stopped
the distribution of bills to customers and froze the
collection of debts owed to the company. The union argued
that the reforms included in the Arrangements Bill would lead
to a reduction in electricity reserves in Israel and endanger
union members' employment and pension benefits. In response,
the GOI, in exchange for the union's pledge to halt the work
stoppages, is considering removing the IEC reforms from the
Arrangements Bill. The government instead may attempt to
implement the privatization via separate legislation
following negotiations with the Histadrut labor federation.


4. (U) The bill also calls for the restructuring and partial
privatization of Israel Military Industries (IMI),a defense
company the GOI has been trying to sell off for more than a
year. If the reforms are implemented, IMI will be split in
two, with one half being merged with GOI-owned defense
company Rafael and the other half being privatized. The
Arrangements Bill also includes plans to initiate the
privatization of the Israeli postal authority and complete
the sale of Israel oil refineries by issuing stock for the
Haifa refinery. (Note: The controlling stake in the Ashdod
refinery, the other half of Israel's oil refining capacity,
was sold via private tender earlier this year. End Note.)

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DEFENSE BUDGET TO BECOME MORE TRANSPARENT
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5. (U) In addition to the privatization initiatives, the 2007
Arrangements Bill includes plans to increase Knesset and MOF
oversight over the defense budget. The GOI aims to separate
the Israel Defense Forces (IDF) and civilian MOD portions of
the defense budget, with the goal of publishing the civilian
portion of the budget in the government register, as is the
practice for all other ministry budgets. (Note: The civilian
portion of the defense budget amounts to about NIS 11 billion
(USD 2.5 billion),a third of the total defense budget. It
includes funding for the seamline fence, pensions,
rehabilitation, IDF museums, defense delegations outside of
Israel, and military transportation. End Note.)

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OTHER LIBERALIZING REFORMS ON THE TABLE
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6. (U) The 2007 Arrangements Bill also outlines plans to
encourage "open skies" aviation agreements with the European
Union, restructure the Israel Airports Authority, consolidate
and streamline the operations of local authorities, and
reform the Israel Lands Administration. It continues the
GOI's efforts to increase participation in the labor force,
particularly among mothers, by expanding day care services
and improving professional training. The bill also calls on
the GOI to continue its policy of reducing the number of
foreign workers in Israel.


7. (U) In addition, the bill will change the annual date that
the state budget must be approved by the Knesset. Current
law calls for the budget to be passed by December 31 of the
year preceding the budget year, but in reality the government
has until March 31 of the budget year before it must pass the
budget or face new elections. If implemented, the new
legislation would require each budget, beginning with the
2008 budget, to be passed by December 31 of the year
preceding the budget year. If the budget is not passed by
December 31, the government will be dissolved and new
elections held unless a different governing coalition can be
formed. (Comment: Completing negotiations on the budget
before the start of the fiscal year, concurrent to the
calendar year in Israel, will serve to reduce instability
within financial markets. End Comment.)

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FINAL MINIMUM WAGE INCREASE POSTPONED
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8. (U) During Cabinet debate over the budget and Arrangements
Bill, the GOI succeeded in postponing the third phase of the
minimum wage increase agreed to by the Olmert government in
its coalition agreement with the Labor Party. The first wage
increase was implemented on July 1, and the second phase will
take place in April 2007 as planned. However, the third
phase will be postponed from June to December 31, 2007,
though the minimum daily wage will increase by NIS 140 (USD
32),instead of the originally planned NIS 125 (USD 30).
Labor Party Chairman and Defense Minister Peretz abstained in
the Cabinet vote to protest the postponement.

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COMMENT
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9. (C) The government's continued efforts to sell IEC and
IMI, the last of the significant privatizations the GOI hopes
to complete, signals its dedication to continuing its
policies of reducing government intervention in the economy
and encouraging competition. These two privatizations,
however, remain politically contentious and may require
lengthy negotiations before they can be completed. The GOI's
recent consideration of plans to remove the IEC reform from
the Arrangements Bill could further delay the privatization
process and may make it easier for the politically powerful
Histadrut to again scuttle the initiative. End Comment.




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